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Uprooting Bhatia International: Part I of Indian Arbitration and Conciliation Act does not apply to arbitration outside India
Practical Law UK Legal Update 7-521-6850 (Approx. 6 pages)
Uprooting Bhatia International: Part I of Indian Arbitration and Conciliation Act does not apply to arbitration outside India
by Practical Law
| Published on 04 Oct 2012 • India |
Priyanka Gandhi (Consultant) and Shruti Thampi (Associate), Juris Corp
In a landmark decision, a five judge Constitutional Bench of the Supreme Court of India has overruled its earlier controversial decision in Bhatia International and held that Part I of the Indian Arbitration and Conciliation Act 1996 would not apply to international commercial arbitrations with their seat outside India.
Background
Section 2(2) of the Indian Arbitration and Conciliation Act 1996 (Act) states that Part I shall apply where the place of arbitration is in India.
Section 9 of the Act empowers the court to grant interim measures before or during the arbitral proceedings or at any time after making the arbitral award, but before the award is enforced.
Section 34 of the Act enables the court to set aside an arbitral award on the grounds specified in the section.
Part I of the Act deals with domestic arbitration and, amongst other things, provides for:
- The appointment of arbitrators.
- Conduct of the arbitration proceedings.
- Interim remedies.
- Recourse against arbitral awards.
- Enforcement.
Part II of the Act provides for enforcement of foreign awards governed by the New York Convention or the Geneva Convention.
In Bhatia International v Bulk Trading SA and another (2002) 4 SCC 105 (Bhatia International), a three judge bench of the Supreme Court held that Part I of the Act applies to international commercial arbitration held outside India, unless expressly excluded. In that case, the Supreme Court entertained a petition under section 9 of the Act to grant interim relief in an arbitration held outside India.
Facts
The present case consisted of a consolidated batch of appeals before a five judge Constitutional Bench of the Supreme Court (Constitutional Bench). The majority were petitions under sections 9 and 34 of the Act, applying for interim relief or to set aside foreign awards, respectively.
Since the Bhatia International decision, there have been contradictory decisions regarding the application of Part I of the Act. Some judgments have relied on Bhatia International, applying Part I to international commercial arbitrations held outside India. However, many judgments have deviated from that case and laid down the principle of "implied exclusion" of Part I of the Act, thus minimising the scope of judicial intervention in arbitrations held outside India (for example, see Videocon Industries v Union of India (2011) 6 SCC 161 and Yograj Infrastructure v Ssang Yong (2011) 9 SCC 735 (discussed in Legal updates, Indian Supreme Court adopts a pro-arbitration approach and Yograj Infrastructure: Reinforcing India's position as an arbitration-friendly jurisdiction, respectively)).
The inconsistency of these judicial decisions has resulted in routine challenges to foreign awards and substantial delays in enforcement of such awards. One of the best examples of such a delay is the case of White Industries v Coal India Limited (one of the cases in the present consolidated batch of appeals), in which a challenge to the jurisdiction of the Indian courts to entertain a petition under section 34 of the Act remained unanswered for almost 10 years.
To remedy these irregularities, the consolidated batch of appeals was referred to the Constitutional Bench.
Decision
The Constitutional Bench overruled Bhatia International and held that Part I of the Act is not applicable to arbitrations held outside India.
The Constitutional Bench observed that section 2(2) of the Act clarifies the legislative intent to restrict the applicability of Part I to arbitrations held in India, thereby keeping it in harmony with the UNCITRAL Model law. It further observed that the omission of the word "only" in section 2(2) did not mean to depart from the territorial principle and extend the scope of Part I to arbitrations held outside India.
As regards the overlap of the provisions in Part I and Part II of the Act, the Constitutional Bench held that there was no overlap between the two parts, in as much as Part I conferred supervisory jurisdiction on the court, while Part II conferred jurisdiction as to the enforcement of foreign awards.
The Constitutional Bench held that the applicability of Part I would depend on a "seat centric" approach. Effectively, Part I would apply to arbitrations held in India, even if the parties are of non-Indian origin, and Part I would not apply to arbitrations held outside India, even if the parties are of Indian origin.
The Constitutional Bench further analysed the effects of not applying Part I of the Act as follows:
- In a foreign-seated international commercial arbitration, an application for interim relief under section 9 cannot be made. Further, parties cannot make section 9 applicable in their agreements to seek interim relief from the Indian courts in arbitrations held outside India. The Indian courts cannot entertain stand-alone applications for interim injunctions, where there is no substantive cause of action. Interim relief can only be granted in aid of a principal relief claimed in the suit.
- A petition to set aside a foreign award under section 34 cannot be made.
- Foreign awards will only fall under the jurisdiction of the Indian courts when enforcement is sought in India in accordance with Part II of the Act.
- The Act cannot be interpreted to incorporate reference to non-Convention awards. Part II of the Act only provides for enforcement of New York or Geneva Convention awards. The clear intention of the legislature was not to include non-Convention awards in the Act. If they are to be included in the Act, this can only be done by suitable amendments made by the Indian Parliament.
- The law governing the arbitration depends on the seat of arbitration. The Constitutional Bench also recognised the distinction between the "seat" and the "venue" of arbitration, concluding that parties are free to choose a venue for the conduct of hearings that is different from the seat of the arbitration. However, if they do so, that will not, of itself, change the seat of the arbitration or the law governing the arbitration.
- The overruling of Bhatia International, and the law declared in the present case, would apply prospectively to arbitration agreements executed after 6 September 2012.
Comment
This decision boosts the image of India as an arbitration friendly jurisdiction and seemingly puts an end to judicial intervention in arbitrations held outside India. Through this decision, the Supreme Court has reinforced the legislative spirit of keeping the Indian arbitration law in tandem with the UNCITRAL Model law and various other conventions.
Interestingly, this decision has also highlighted certain issues for the Indian Parliament to consider, such as the lack of availability of interim remedies for arbitrations held outside India and the fate of awards being enforced from non-convention countries.
Further, restricting the outcome of this decision to arbitration agreements executed after 6 September 2012 is also a matter of concern, as parties who have entered into an arbitration agreement prior to 6 September 2012 will not be able to benefit from this decision and the ratio of Bhatia International would still be applicable to them. However, parties can amend their existing arbitration agreements to bring themselves within the purview of the ratio of this decision.